SPYR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 2017 AND 2016
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
This summary of accounting policies for SPYR,
Inc. and subsidiaries (the “Company”) is presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of
the consolidated financial statements.
The Company was incorporated as Conceptualistics,
Inc. on January 6, 1988 in Delaware. Subsequent to its incorporation, the Company changed its name to Eat at Joe’s, Ltd.
In February 2015, the Company changed its name to SPYR, Inc. and adopted a new ticker symbol “SPYR” effective March
12, 2015.
Nature of Business
The primary focus of SPYR, Inc. (the “Company”)
is to act as a holding company and develop a portfolio of profitable subsidiaries, not limited by any particular industry or business.
Through our wholly owned subsidiaries, SPYR
APPS, LLC and SPYR APPS, Oy, we operate our mobile games and applications business. The focus of the SPYR APPS subsidiaries is
the development and publication of our own mobile games as well as the publication of games developed by third-party developers.
As of October 5, 2016, SPYR APPS, Oy ceased business activities and completed the dissolution process on October 18, 2017.
Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the
Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration
of the lease the restaurant closed. Pursuant to current accounting guidelines, the assets and liabilities of EAJ as well as the
results of its operations were presented in these financial statements as discontinued operations.
Principles of Consolidation
The consolidated financial statements include
the accounts of SPYR, Inc. and its wholly-owned subsidiaries, SPYR APPS, LLC, a Nevada Limited Liability Company, E.A.J.: PHL,
Airport Inc., a Pennsylvania corporation (discontinued operations, see Note 7), and Branded Foods Concepts, Inc., a Nevada corporation.
Intercompany accounts and transactions have been eliminated.
Going Concern
The accompanying financial statements have
been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization
of assets and satisfaction of liabilities in the normal course of business, however, the issues described below raise substantial
doubt about the Company’s ability to do so.
As shown in the accompanying financial statements,
for the year ended December 31, 2017, the Company recorded a net loss from continuing operations of $15,993,000 and utilized cash
in continuing operations of $4,020,000. As of December 31, 2017, our cash balance was $86,000 and we had trading securities of
$48,000. In addition, the Company’s restaurant, Eat at Joes closed in April 2017, concurrent with the expiration of the lease.
These issues raise substantial doubt about the Company’s ability to continue as a going concern.
The Company plans to expand its mobile games
and application development and publishing activities, such as Pocket Starships, through acquisition and/or development of its
own intellectual property and publishing agreements with developers.
Historically,
we have financed our operations primarily through private sales of our trading securities or through sales of our common stock.
If our sales goals for our products do not materialize as planned, we believe that the Company can reduce its
operating
and product development costs that would allow us to maintain sufficient cash levels to continue operations. However, if we are
not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our
operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans.
The ability of the Company to continue
as a going concern is dependent upon the success of future capital offerings or alternative financing arrangements and
expansion of its operations. The accompanying financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern. Management is actively pursuing additional sources of financing
sufficient to generate enough cash flow to fund its operations through calendar year 2018. However, management cannot make
any assurances that such financing will be secured.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions used by management affected
impairment analysis for trading securities, fixed assets, intangible assets, capitalized licensing rights, amounts of potential
liabilities, and valuation of issuance of equity securities. Actual results could differ from those estimates.
Earnings (Loss) Per Share
The Company’s computation of earnings
(loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss)
available to common stockholders by the weighted average number of common shares during the period. Diluted EPS reflects the potential
dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company.
In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds
are used to purchase common stock at the average market price during the period. Shares of restricted stock are included in the
basic weighted average number of common shares outstanding from the time they vest.
The basic and fully diluted shares for the
year ended December 31, 2017 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class E –
415,559, Options – 13,320,000, Warrants – 1,700,000) would have had an anti-dilutive effect due to the Company generating
a loss for the year ended December 31, 2017.
The basic and fully diluted shares for the
year ended December 31, 2016 are the same because the inclusion of the potential shares (Non-vested Common – 20,333, Class
A – 26,909,028, Class E – 161,108, Options – 12,900,000 and Warrants – 200,000) would have had an anti-dilutive
effect due to the Company generating a loss for the year ended December 31, 2016.
Capitalized Gaming Assets and Licensing Rights
Capitalized gaming
assets and licensing rights represent costs to acquire trademarks, copyrights, software, technology, music or other intellectual
property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may
obtain the right to use the intellectual property in multiple products over a number of years, or alternatively, for a single product.
Significant management judgments and estimates
are utilized in assessing the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment
of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised
forecasted or actual product sales are less than the originally forecasted amounts utilized in the initial recoverability analysis,
the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge.
Material differences may result in the amount and timing of expenses for any period if management makes different judgments or
utilizes different estimates in evaluating these qualitative factors.
On October 23, 2017, the Company completed
the acquisition of all assets that refer, relate or pertain to the real—time cross-platform MMO game commonly known and referred
to as “Pocket Starships,” including but not limited to all intellectual property, know how, “urls,” websites,
game engines, game store accounts, prior versions, company names and trade names, business plans, financial reports, financial
data, employee data, customer lists, forecasts, strategies, and all other business information; manufacturing or other technical
or scientific know-how, specifications, technical drawings, drawings, artwork, music, diagrams, schematics, technology, processes,
and any other trade secrets, discoveries, ideas, concepts, know-how, techniques, materials, formulae, compositions, information,
data, results, plans, surveys and/or reports of a technical nature; and software programs (including all forms of code), software
documentation, software development kits, game design documents, and formulae related to the current, future and proposed products
and services, including any additions, enhancements or modifications to the foregoing or derivatives thereof after the date hereof.
As consideration for the acquisition,
the Company issued eight million shares of the Company’s restricted common stock valued at $3,200,000, options to
purchase up to eight million shares of the Company’s restricted common stock valued at $2,452,000, and assumed
liabilities of $210,000 for a total purchase price of $5,862,000. The options are fully vested, exercisable at a price per
share of $0.50 and will expire starting August 31, 2020. The acquisition of “Pocket Starships” was reported as
part of capitalized gaming assets and licensing rights valued at $481,000 based upon discounted cash flows. The difference
between purchase price and the capitalized value was recorded as loss on write down on assets of $5,381,000. The Company will
amortize the capitalized cost on a straight-line basis over an estimated life of seven to ten years.
Further, the options previously issued pursuant
to a purchase option agreement dated June 25, 2016, which provided for the option to purchase up to three million, seven hundred
and fifty thousand shares of Registrant’s common stock, are fully vested and remain in effect in accordance with the terms
of the purchase option agreement.
Also during 2017, the Company capitalized $175,000
pursuant to a licensing agreement for the non-exclusive, limited right to incorporate certain intellectual property (IP) from various
STAR TREK
television series in to future updates to and expansions of the Pocket Starships game. The Company estimates that
the IP will have an estimated life of 1.6 years, which approximates the term of the license. In addition, we also acquired the
game titled Battlewack: Idle Lords for $100,000, pursuant to settlement with the game owner and developer. Battlewack: Idle Lords
requires additional development before it can be released.
In a prior period, the Company capitalized
$50,000 as a result of the acquisition of licensing rights of one gaming application. The Company estimates that the gaming application
will have an estimated life of five years, which approximates the term of the license.
During the year ended December 31, 2017, the
Company recorded amortization expense of $52,000. As of December, 2017 and December 31, 2016, the accumulated amortization was
$52,000 and $10,000, respectively and the unamortized capitalized gaming assets and licensing rights amounted to $743,000 and $40,000
respectively.
Software Development Costs
Costs incurred for software development are
expensed as incurred. During the years ended December 31, 2017 and 2016, the Company incurred $1,666,000 and $1,151,000 in software
development costs paid to
independent gaming software developers.
Revenue Recognition
Through our wholly owned subsidiary SPYR APPS,
LLC, we develop, publish and co-publish mobile games, and then generate revenue through those games by way of advertising and in-app
purchases. We recognize revenue when the sale is completed.
The Company recognizes revenue using four basic
criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured, which is typically after
receipt of payment and delivery.
Income Taxes
The Company accounts for income taxes under
the provisions of ASC 740 “Accounting for Income Taxes,” which requires a company to first determine whether it is
more likely than not (which is defined as a likelihood of more than fifty percent) that a tax position will be sustained based
on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge
of all relevant information. A tax position that meets this more likely than not threshold is then measured and recognized at the
largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
Deferred income taxes are recognized for the
tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes at each year end, based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income. A valuation allowance is recognized when, based on
the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets
will not be realized. The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances
change and cause a change in management's judgment about the recoverability of deferred tax assets, the impact of the change on
the valuation is reflected in current income. Income tax expense is the sum of current income tax plus the change in deferred tax
assets and liabilities.
Cash and Cash Equivalents
The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held
for investment purposes.
Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation or amortization. Depreciation is recorded at the time property and equipment is placed in service using
the straight-line method over the estimated useful lives of the related assets, which range from three to ten years. Leasehold
improvements are amortized over the shorter of the expected useful lives of the related assets or the lease term. The estimated
economic useful lives of the related assets as follows:
Furniture and fixtures
|
|
|
5-10 years
|
|
Equipment
|
|
|
5- 7 years
|
|
Computer equipment
|
|
|
3 years
|
|
Leasehold improvements
|
|
|
6 years
|
|
Maintenance and repairs are charged to operations;
betterments are capitalized. The cost of property sold or otherwise disposed of and the accumulated depreciation and amortization
thereon are eliminated from the property and related accumulated depreciation and amortization accounts, and any resulting gain
or loss is credited or charged to operations.
Intangible Assets
The Company accounts for its intangible assets
in accordance with the authoritative guidance issued by the ASC Topic 350 –
Goodwill and Other
. Intangibles are valued
at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected
period of benefit. The Company evaluates non-amortizing intangible assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable from its estimated undiscounted future cash flows.
The cost of internally developing, maintaining
and restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in
a continuing business and related to an entity as a whole, are recognized as an expense when incurred.
An intangible asset with a definite useful
life is amortized; an intangible asset with an indefinite useful life is not amortized until its useful life is determined to be
no longer indefinite. The remaining useful lives of intangible assets not being amortized are evaluated at least annually to determine
whether events and circumstances continue to support an indefinite useful life.
During the year ended December 31, 2017, the
Company recorded amortization expense of $6,000. As of December 31, 2017, total intangible assets amounted to $20,000 which consist
of website development costs. There were no indications of impairment based on management’s assessment of these assets at
December 31, 2017. Factors we consider important that could trigger an impairment review include significant underperformance relative
to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy
for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing decreased
revenues and increased costs, we may have to record impairment to our intangible assets.
Stock-Based Compensation
The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized over
the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance
with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined
at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn
the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period
on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option
grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of the Company's stock option
and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free
interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense
is recorded based upon the value derived from the Black-Scholes Option Pricing model and based on actual experience. The assumptions
used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.
The Company also issues restricted shares of
its common stock for share-based compensation programs to employees and non-employees. The Company measures the compensation cost
with respect to restricted shares to employees based upon the estimated fair value at the date of the grant and is recognized as
expense over the period which an employee is required to provide services in exchange for the award. For non-employees, the Company
measures the compensation cost with respect to restricted shares based upon the estimated fair value at measurement date which
is either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn
the equity instruments is complete.
Concentration of Credit Risk
The Company has no significant off-balance-sheet
concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The
Company maintains the majority of its cash balances with financial institutions, in the form of demand deposits. The Company believes
that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness
and financial viability of this financial institution.
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10
of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37
of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial
instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted
in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and
comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy
gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority
to unobservable inputs.
The three (3) levels of fair value hierarchy
defined by Paragraph 820-10-35-37 are described below:
Level 1: Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2: Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of
the reporting date.
Level 3: Pricing inputs that are generally observable inputs and not corroborated by market data.
The carrying amount of the Company’s
financial assets and liabilities, such as cash and cash equivalents, accounts receivable, other receivable, prepaid expenses, and
accounts payable and accrued expenses approximate their fair value because of the short maturity of those instruments.
The Company’s trading securities are measured at fair value
using level 1 fair values.
Advertising Costs
Advertising, marketing and promotional costs are expensed as incurred
and included in general and administrative expenses.
Advertising, marketing and promotional expense
was $195,000 and $350,000 for the years ended December 31, 2017, and 2016, respectively and was reflected as part of Other General
and Administrative Expenses on the accompanying consolidated statements of operations.
Litigation Costs
Material litigation costs expected to be incurred
in connection with loss contingencies are estimated and included in professional fees.
Reclassifications
In presenting the Company’s consolidated
statement of operations for the year ended December 31, 2016, certain costs and expenses paid to third party developers in the
amount of $735,000, that were previously reflected as other general and administrative expenses, have been reclassified and reported
as part of research and development.
Recent Accounting Standards
In May 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
.
ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance
under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also
will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill
a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted
only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to
transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Our revenue
is recognized at the time of sale and we do not expect that the adoption of ASU 2014-09 will have any significant impact on our
operating cash flows.
In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim
and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process
of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
Other recent accounting pronouncements issued
by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future
consolidated financial statements.
NOTE 2 - TRADING SECURITIES
Trading securities are purchased with the intent
of selling them in the short term. Trading securities are recorded at market value and the difference between market value and
cost of the securities is recorded as an unrealized gain or loss in the statement of operations. Gains from the sales of such marketable
securities will be utilized to fund payment of obligations and to provide working capital for operations and to finance future
growth, including, but not limited to: conducting our ongoing business, conducting strategic business development, marketing analysis,
due diligence investigations into possible acquisitions, and research and development and implementation of the Company’s
business plans generally.
The Company’s securities investments
that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading
securities are recorded at fair value based on quoted market price (level 1) on the balance sheet in current assets, with the change
in fair value during the period included in earnings.
Investments in securities are summarized as
follows:
|
|
Fair Value at
|
|
|
|
Proceeds
|
|
Loss on
|
|
Contributed
|
|
Unrealized
|
|
Fair Value at
|
Year
|
|
Beginning of Year
|
|
Purchases
|
|
from
Sale
|
|
Sale
|
|
Capital
|
|
Loss
|
|
December 31, 2017
|
|
2017
|
|
|
$
|
59,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,000
|
)
|
|
$
|
48,000
|
|
|
2016
|
|
|
$
|
324,000
|
|
|
$
|
510,000
|
|
|
$
|
(783,000
|
)
|
|
$
|
(95,000
|
)
|
|
$
|
160,000
|
|
|
$
|
(57,000
|
)
|
|
$
|
59,000
|
|
Realized gains and losses are determined on
the basis of specific identification. During the years ended December 31, 2017 and 2016, sales proceeds and gross realized gains
and losses on securities classified as available-for-sale securities and trading securities were:
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Sales proceeds
|
|
$
|
—
|
|
|
$
|
783,000
|
|
Gross realized (losses)
|
|
$
|
—
|
|
|
$
|
(95,000
|
)
|
Gross realized gains
|
|
|
—
|
|
|
|
—
|
|
Gain (loss) on sale of trading securities
|
|
$
|
—
|
|
|
$
|
(95,000
|
)
|
The following table discloses the assets measured
at fair value on a recurring basis and the methods used to determine fair value:
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in Active
|
|
Other
|
|
Unobservable
|
|
|
Fair Value at
|
|
Markets
|
|
Observable Inputs
|
|
Inputs
|
|
|
December 31, 2017
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Trading securities
|
|
$ 48,000
|
|
$ 48,000
|
|
$ -
|
|
$ -
|
Money market funds
|
|
36,000
|
|
36,000
|
|
-
|
|
-
|
Total
|
|
$ 84,000
|
|
$ 84,000
|
|
$ -
|
|
$ -
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
|
|
|
in Active
|
|
Other
|
|
Unobservable
|
|
|
Fair Value at
|
|
Markets
|
|
Observable Inputs
|
|
Inputs
|
|
|
December 31, 2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Trading securities
|
|
$ 59,000
|
|
$ 59,000
|
|
$ -
|
|
$ -
|
Money market funds
|
|
36,000
|
|
36,000
|
|
-
|
|
-
|
Total
|
|
$ 95,000
|
|
$ 95,000
|
|
$ -
|
|
$ -
|
Generally, for all trading securities and available-for-sale
securities, fair value is determined by reference to quoted market prices (level 1).
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Equipment
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
Furniture & fixtures
|
|
|
114,000
|
|
|
|
114,000
|
|
Leasehold improvements
|
|
|
107,000
|
|
|
|
107,000
|
|
|
|
|
249,000
|
|
|
|
249,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(115,000
|
)
|
|
|
(68,000
|
)
|
Property and Equipment, Net
|
|
$
|
134,000
|
|
|
$
|
181,000
|
|
Depreciation and amortization expense for the
years ended December 31, 2017 and 2016 was $105,000 and $98,000, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
On October 3, 2016, the Company sold trading
securities valued at $340,000 to Berkshire Capital Management Co., Inc. (“Berkshire”) for $500,000. Berkshire is controlled
by Joseph Fiore, majority shareholder and chairman of the board of directors of the Company. The Company reported the $160,000
difference between the value of the trading securities and cash sale price as contributed capital.
On
September 5, 2017, the Company obtained a revolving line of credit from Berkshire
Capital Management Co., Inc.
The
line of credit allows the Company to borrow up to $1,000,000 with interest at 6% per annum. The loan is secured by a first lien
on all the assets of the Company and its wholly owned subsidiary SPYR APPS, LLC. Repayment on the loan is due February 28, 2019.
As of December 31, 2017, we have borrowed $800,000.
NOTE 5 - INCOME TAXES
The Company did not provide any Federal and State income tax for
the years ended December 31, 2017 and 2016 due to the Company’s net losses.
A reconciliation of the provision for income taxes computed using
the US statutory federal income tax rate is as follows:
|
|
December 31,
|
|
|
2017
|
|
2016
|
Tax provision at US statutory federal income tax rate
|
|
$
|
(690,000
|
)
|
|
$
|
(2,320,000
|
)
|
State income tax, net of federal benefit
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowances
|
|
|
690,000
|
|
|
|
2,320,000
|
|
Provision for Income Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The significant components of the Company’s
deferred tax assets were:
|
|
December 31,
|
|
|
2017
|
|
2016
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
4,926,000
|
|
|
$
|
3,746,000
|
|
Unrealized losses on marketable securities
|
|
|
2,000
|
|
|
|
251,000
|
|
Stock based compensation
|
|
|
—
|
|
|
|
197,000
|
|
Depreciation and other
|
|
|
(13,000
|
)
|
|
|
31,000
|
|
|
|
|
4,915,000
|
|
|
|
4,225,000
|
|
Less valuation allowance
|
|
|
(4,915,000
|
)
|
|
|
(4,225,000
|
)
|
Net Deferred Tax Asset
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred tax assets and liabilities reflect
the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax
rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
As of December 31, 2017, the Company recorded
a valuation allowance of $4,915,000 for its deferred tax assets. The Company believes that such assets did not meet the more likely
than not criteria to be recoverable through projected future profitable operations in the foreseeable future.
Effective January 1, 2007, the Company adopted
FASB guidance that addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should
be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The FASB also provides
guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires
increased disclosures. As of December 31, 2017 and 2016, the Company does not have a liability for unrecognized tax benefits.
The Company’s net operating loss carry
forward for income tax purposes as of December 31, 2017 was approximately $18,700,000 and may be offset against future taxable
income through 2037. Utilization of the Company’s net operating losses may be subject to substantial annual limitation if
the Company experiences a 50% change in ownership, as provided by the Internal Revenue Code and similar state provisions. Such
an ownership change would substantially increase the possibility of net operating losses expiring before complete utilization.
In December 2017, new tax known as Tax
Cut and Jobs Act of 2017 was enacted. The new tax law includes significant changes to the U.S. corporate tax systems including
a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment of foreign earnings going forward, a deemed
repatriation transition tax, and changes to allow net operating losses to be carried forward indefinitely. In addition, net operating
losses arising after December 31, 2017 will be limited to the lesser of the available net operating loss or 80% of the pre-net
operating loss taxable income.
In accordance with ASC 740, the impact
of a change in tax law is recorded in the period of enactment. During the fourth quarter of 2017, the Company recorded a non-cash,
change in its net deferred tax balances of approximately $2,429,000 related to the tax rate change. The Company estimates that
its deemed repatriation liability will not be material due to its limited international operations.
Uncertain Tax Positions
ASC 740 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken
in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination
by taxing authorities. In many cases the Company’s uncertain tax positions are related to tax years that remain subject to
examination by relevant tax authorities. The Company is generally no longer subject to U.S. federal, state or local income tax
examinations by tax authorities for years before 2014. However, as of December 31, 2017, the years subsequent to 2013 remain open
and could be subject to examination by tax authorities including the U.S. Internal Revenue Service and major state and local tax
jurisdictions in the United States.
Interest costs related to unrecognized tax
benefits are classified as “Interest expense, net” in the accompanying consolidated statements of operations. Penalties,
if any, would be recognized as a component of “General and administrative expenses.”
As of December 31, 2017, the Company had no
liability for unrecognized tax benefits and no accrual for the payment of related interest and penalties, nor did the Company recognized
any interest or penalties expense related to unrecognized tax benefits during the years ended December 31, 2016 or 2015.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Rent
The Company leases approximately 5,169 square
feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated May 21, 2015 and expiring on December 31,
2020. Under the lease, the Company pays annual base rent on an escalating scale ranging from $142,000 to $152,000.
The Company’s wholly owned subsidiary
leases office shared office space in Berlin Germany pursuant to a lease dated June 29, 2018 and expiring on March 31, 2018. Under
the lease, the Company pays monthly base rent of $4,248 (3,570 Euros).
The minimum future lease payments under these leases for the next
five years are:
Year Ended December 31,
|
|
Amount
|
|
2018
|
|
|
$
|
161,000
|
|
|
2019
|
|
|
|
150,000
|
|
|
2020
|
|
|
|
152,000
|
|
|
2021
|
|
|
|
—
|
|
|
2022
|
|
|
|
—
|
|
|
Thereafter
|
|
|
|
—
|
|
|
Total Five Year Minimum Lease Payments
|
|
|
$
|
463,000
|
|
Rent expense for the years ended December 31,
2017 and 2016 was $186,000 and $146,000, respectively. In addition to the minimum basic rent, rent expense also includes approximately
$200 per month for other items charged by the landlord in connection with rent.
Legal Proceedings
We are involved in certain legal proceedings
that arise from time to time in the ordinary course of our business. Except for income tax contingencies, we record accruals for
contingencies to the extent that our management concludes that the occurrence is probable and that the related amounts of loss
can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. A material legal proceeding
that is currently pending is as follows:
On October 14, 2015, the Company was named
as a defendant in a case filed in the United States District Court for the District of Delaware case: Zakeni Limited v. SPYR, Inc.,
f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible debentures in the aggregate
principal amount of $1,500,000 in 1998. The plaintiff is seeking payment or conversion of said convertible debentures together
with accrued interest and unspecified damages. The Company believes the claim is not a valid debt and is vigorously defending this
lawsuit. On December 4, 2015, the Company filed a motion to dismiss the suit based on the statute of limitations. In evaluating
a motion to dismiss, the Court is only allowed to view the allegations set forth in the plaintiff’s complaint and documents
referenced therein, must assume that those allegations are true, and must construe all evidence contained in the referenced documents
in a light most favorable to the plaintiff. On August 24, 2016, under this standard, the Court determined that the legal requirements
to grant the motion to dismiss had not been fully satisfied and denied the Company’s Motion to Dismiss. Accordingly, no final
determinations regarding liability have been made, the case will proceed to be litigated in the normal course, and, if the Company
elects, it will have the ability to again present its arguments for dismissal prior to trial through a motion for summary judgment,
which will allow for a determination to be made based on a legal standard that is slightly less favorable to the plaintiff. If
that motion is denied, the Company will still have the opportunity to present all of its arguments and defenses at trial, at which
Zakeni will have to prove its case by a preponderance of the evidence. The case is scheduled for trial on October 30, 2018 and
the Company has recorded anticipated litigation and court costs in accrued expenses. Based upon available information at this stage
of litigation, it is still the belief of management and opinion of in-house counsel that the Company will obtain a favorable ruling.
Management does not expect any loss resulting from this lawsuit to be material.
Employment Agreements
Pursuant to employment agreements entered in
December 2014 and October 2015, the Company agreed to compensate three officers with a base salary in the aggregate of $450,000
per year through 2020. In addition, as part of the employment agreement, the Company also agreed to grant these officers an aggregate
of 1.55 million shares of common stock at the beginning of each employment year.
Game Development Agreements
The Company is party to various game development
agreements. Payments are contingent upon the developer(s) meeting specified milestones and game performance. Pursuant to these
agreements, the Company has agreed to pay up to $843,000 during the period from January 2018 through January 2019.
Common Stock To Be Issued
The Company is party to various third-party
service agreements to be paid through the issuance of the company’s restricted common stock. Contingent upon the third parties
providing the agreed upon services, the Company will issue up to 6,530,000 restricted common shares at various intervals during
the period from January 2018 through February 2019. The shares will be recorded at fair value on the date earned under the respective
agreements.
NOTE 7 – EQUITY TRANSACTIONS
Common Stock:
Year Ended December 31, 2016:
During the year ended December 31, 2016, the
Company issued an aggregate of 100,000 shares of restricted common stock to consultants for cash of $15,000.
During the year ended December 31, 2016, the
Company issued an aggregate of 1,843,987 shares of common stock to employees with a total fair value of $413,000 for services rendered.
The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $413,000 upon
issuance. The shares issued were valued at the date of the respective agreements.
During the year ended December 31, 2016, the
Company issued an aggregate of 4,509,912 shares of restricted common stock to consultants with a total fair value of $1,951,000.
The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,951,000 upon
issuance. The shares issued were valued at the date of the respective agreements.
In April 2016, the Company cancelled a total
of 325,000 shares of common stock issued to an employee pursuant to a settlement and termination agreement. Pursuant to current
accounting guidelines, no further accounting was necessary for the cancellation of the 325,000 shares of common stock other than
to remove the par value amounting to $33.00.
Year Ended December 31, 2017:
During the year ended December 31, 2017, the
Company issued an aggregate of 750,000 shares of restricted common stock to an existing shareholder and former officer/employee
for cash of $300,000. The common shares had a fair value of $510,000 at the date of sale, and as a result, the Company reflected
an additional expense of $210,000 to account the difference between the sale price and the fair market value of common shares sold.
During the year ended December 31, 2017, the
Company issued an aggregate of 2,050,000 shares of restricted common stock to employees with a total fair value of $1,109,000 for
services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the
entire $1,109,000 upon issuance. The shares issued were valued at the date earned under the respective agreements.
During year ended December 31, 2017, the Company
issued an aggregate of 12,691,924 shares of restricted common stock to consultants with a total fair value of $3,758,000. The shares
issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $3,758,000 upon issuance.
The shares issued were valued at the date earned under the respective agreements.
During year ended December 31, 2017, the Company
issued an aggregate of 8,000,000 shares of restricted common stock to third parties with a total fair value of $3,320,000. The
shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $3,320,000 upon
issuance. The shares issued were valued at the date earned under the respective agreements. (See Note 1 “Capitalized Gaming
Assets and Licensing Rights”)
Common Stock with Vesting Terms:
The following table summarizes common stock
with vesting terms activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
Non-vested, December 31, 2015
|
329,167
|
|
$
|
0.47
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(308,334)
|
|
|
0.47
|
|
Forfeited
|
—
|
|
|
—
|
Non-vested, December 31, 2016
|
20,833
|
|
$
|
0.47
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(20,833)
|
|
|
0.47
|
|
Forfeited
|
—
|
|
|
—
|
Non-vested, December 31, 2017
|
—
|
|
$
|
—
|
In During 2015, the Company granted and issued
600,000 shares of its restricted common stock to employees and third party service providers. The 600,000 shares were forfeitable
and deemed earned upon completion of service over a period of twelve to twenty-four months. The Company recognized the fair value
of these shares as they vested. As of December 31, 2016, 579,167 of these shares had vested and 20,833 common shares were unvested.
During the year ended December 31, 2017, the remaining 20,833 of these shares vested and as a result, the Company recognized compensation
cost of $46,000. As of December 31, 2017, there were no unvested shares and no unearned compensation costs to be recorded.
When calculating basic net income (loss) per
share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted
net income per share, these shares, if dilutive, are included in weighted average common shares outstanding as of their grant date.
Options:
The following table summarizes common stock
options activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Options
|
|
Price
|
|
December 31, 2015
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
12,900,000
|
|
|
|
2.83
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding, December 31, 2016
|
|
|
|
12,900,000
|
|
|
$
|
2.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
8,920,000
|
|
|
|
0.55
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
(8,500,000
|
)
|
|
|
3.88
|
|
|
Outstanding, December 31, 2017
|
|
|
|
13,320,000
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
|
|
|
4,400,000
|
|
|
$
|
2.83
|
|
|
Exercisable, December 31, 2017
|
|
|
|
12,250,000
|
|
|
$
|
1.58
|
|
The weighted average grant date fair value
of options granted during the years ended December 31, 2017 and 2016, was $0.55 and $2.83 respectively.
In June 2016, the Company granted options to
purchase 3.75 million shares of restricted common stock valued at $472,000 pursuant to the planned acquisition of Pocket Starships
(See Note 1 “Capitalized Gaming Assets and Licensing Rights”). The stock options are fully vested, exercisable at a
price per share of $1.00, $2.50, and $5.00 and stated to expire December 31, 2017 through December 31, 2019. During the year ended
December 31, 2016, the Company recognized compensation expense of $472,000. On December 31, 2017, options to purchase 500,000 shares
of restricted common stock expired, with the remaining 3.25 million expiring December 31, 2018 through December 31, 2019.
In August 2016, the Company granted an employee
options to purchase a total of 7.5 million shares of common stock with an exercise price per share of $1.00, $2.50 and $5.00. The
options are fully vested upon grant but are only exercisable in three tranches starting in January 2017, 2018 and 2019. Total fair
value of the options at grant date amounted to $201,000 computed using the Black-Scholes Option Pricing Model. The Company determined
the appropriate treatment is to recognize the fair value of the options over the service period, which would be when the options
are fully exercisable. The first tranche of 1 million shares became exercisable on January 1, 2017 with a fair value of the options
at grant date of $28,000 computed using the Black-Scholes Option Pricing Model. During the year ended December 31, 2016, the Company
recognized compensation expense of $28,000. Subsequent to December 31, 2016, the employment agreement was terminated, all options
cancelled, and no further compensation expense for these options will be recognized.
In October 2016, the Company granted an
employee options to purchase a total of 1.5 million shares of restricted common stock with an exercise price per share of
$1.00, $2.50 and $5.00 and will expire starting December 31, 2017 through December 31, 2019. The options are fully vested
upon grant but are only exercisable in three tranches starting in October 2016 and January 2018 and 2019. Total fair value of
the options at grant date amounted to $145,000 computed using the Black-Scholes Option Pricing Model. The Company determined
the appropriate treatment is to recognize the fair value of the options over the service period, which would be when the
options are fully exercisable. During the year ended December 31, 2016, the Company recognized compensation expense of
$62,000. During the year ended December 31, 2017, the Company recognized compensation expense of $60,000. On December 31,
2017, options to purchase 500,000 shares of restricted common stock at $0.50 per share expired. As of December 31, 2017,
future unamortized costs amounted to approximately $22,000.
In October, 2016, the Company signed and investor
relations consulting agreement with a third party granting options to purchase 50,000 shares of restricted common stock per month
beginning October 24, 2016 through October 24, 2017 with an exercise price of $1.00 per share that will expire 36 months from date
of grant. The options are granted monthly and fully vested and exercisable upon grant. As of December 31, 2016, 150,000 options
were granted. Total fair value of the options at their respective grant dates amounted to $59,000 computed using the Black-Scholes
Option Pricing Model. During the year ended December 31, 2016, the Company fully recognized the $59,000 compensation expense. As
of December 31, 2017, 500,000 options were granted. Total fair value of the options at their respective grant dates amounted to
$177,000 computed using the Black-Scholes Option Pricing Model. During the year ended December 31, 2017, the Company fully recognized
the $177,000 compensation expense.
During the year ended December 31, 2017, the
Company granted stock options to consultants to purchase a total of 420,000 shares of common stock. A total of 350,000 options
vested during 2017 while the remaining 70,000 options will vest through February 2018 at a rate of 35,000 shares per month. The
options are exercisable at $1.00 per share and will expire over 4 years. The fair values of the options are recorded at their respective
grant dates computed using the Black-Scholes Option Pricing Model. During the year ended December 31, 2017, the Company recognized
$210,000 in compensation expense based upon the vesting of outstanding options. As of December 31, 2017, the unamortized compensation
expense for unvested options was $42,000 which will be recognized during 2018.
During year ended December 31, 2017, the Company
granted stock options purchase up to eight million shares of the Company’s restricted common stock to third parties valued
at $2,452,000. The options are fully vested, exercisable at a price per share of $0.50 and will expire starting August 31, 2020.
The fair values of the options were computed using the Black-Scholes Option Pricing Model, and recorded at the date of grant. (See
Note 1 “Capitalized Gaming Assets and Licensing Rights”)
The weighted average exercise prices, remaining
lives for options granted, and exercisable as of December 31, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Exercisable Options
|
Options
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
Exercise Price
|
|
|
|
Life
|
|
Average Exercise
|
|
|
|
Average Exercise
|
Per Share
|
|
Shares
|
|
(Years)
|
|
Price
|
|
Shares
|
|
Price
|
$0.50
|
|
8,000,000
|
|
2.67
|
|
$0.50
|
|
8,000,000
|
|
$0.50
|
$1.00
|
|
1,070,000
|
|
1.81 – 3.10
|
|
$1.00
|
|
1,000,000
|
|
$1.00
|
$2.50
|
|
1,250,000
|
|
1
|
|
$2.50
|
|
750,000
|
|
$2.50
|
$5.00
|
|
3,000,000
|
|
2
|
|
$5.00
|
|
2,500,000
|
|
$5.00
|
|
|
13,320,000
|
|
|
|
$3.97
|
|
12,250,000
|
|
$1.58
|
At December 31, 2017, the Company’s closing
stock price was $0.265 per share. As all outstanding options had an exercise price greater than $0.265 per share, there was no
intrinsic value of the options outstanding at December 31, 2017.
The following table summarizes options granted
with vesting terms activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
Non-vested, December 31, 2015
|
—
|
|
$
|
—
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
Non-vested, December 31, 2016
|
—
|
|
$
|
—
|
|
Granted
|
420,000
|
|
|
1.00
|
|
Vested
|
(350,000)
|
|
|
1.00
|
|
Forfeited
|
—
|
|
|
—
|
Non-vested, December 31, 2017
|
70,000
|
|
$
|
1.00
|
Warrants:
The following table summarizes common stock
warrants activity:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Warrants
|
|
Price
|
|
December 31, 2015
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
200,000
|
|
|
|
0.50
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding, December 31, 2016
|
|
|
|
200,000
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
1,700,000
|
|
|
|
1.06
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
(200,000
|
)
|
|
|
050
|
|
|
Outstanding, December 31, 2017
|
|
|
|
1,700,000
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
|
|
|
200,000
|
|
|
$
|
0.50
|
|
|
Exercisable, December 31, 2017
|
|
|
|
1,700,000
|
|
|
$
|
1.06
|
|
In October and November 2016, pursuant to advisory
services agreement, the Company granted warrants to purchase a total of 200,000 shares of restricted common stock with an exercise
price of $0.50 and will expire 12 months after date of grant. The options are fully vested and exercisable upon grant. Total fair
value of the options at grant date amounted to $50,000 computed using the Black-Scholes Option Pricing Model and was fully recognized
on the date of grant.
In March 2017, pursuant to an employee separation
agreement, the Company granted warrants to purchase a total of 1,000,000 shares of restricted common stock with an exercise price
of $1.50 and $2.00 which will expire December 31, 2018. The warrants are fully vested and exercisable upon grant. Total fair value
of the warrants at grant date amounted to $290,000 computed using the Black-Scholes Option Pricing Model and was fully recognized
on the date of grant.
In October 2017, pursuant to advisory services
agreement, the Company granted warrants to purchase a total of 100,000 shares of restricted common stock with an exercise price
of $0.50 and will expire 12 months after date of grant. The options are fully vested and exercisable upon grant. Total fair value
of the options at grant date amounted to $20,000 computed using the Black-Scholes Option Pricing Model and was fully recognized
on the date of grant.
In October 2017, pursuant to a services agreement,
the Company granted warrants to purchase a total of 600,000 shares of restricted common stock with an exercise price of $0.01 and
will expire December 31, 2020. The options are fully vested and exercisable upon grant. Total fair value of the options at grant
date amounted to $188,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the date of grant.
The weighted average exercise prices, remaining
lives for warrants granted, and exercisable as of December 31, 2017, were as follows:
|
|
Outstanding and Exercisable Warrants
|
|
Warrants
|
|
|
|
|
|
Exercise Price
|
|
|
|
Life
|
|
Per Share
|
|
Shares
|
|
(Years)
|
|
$0.01
|
|
600,000
|
|
3.00
|
|
$0.50
|
|
100,000
|
|
0.83
|
|
$1.50
|
|
500,000
|
|
1.00
|
|
$2.00
|
|
500,000
|
|
1.00
|
|
|
|
1,700,000
|
|
|
|
At December 31, 2017, the Company’s closing
stock price was $0.265 per share. As all outstanding warrants had an exercise price greater than $0.265 per share, there was no
intrinsic value of the warrants outstanding at December 31, 2017.
The table below represents the average assumptions
used in valuing the stock options and warrants granted in fiscal 2016:
|
|
|
Year Ended
December 31,
|
|
|
|
|
2016
|
|
Expected life in years
|
|
|
0.61 – 3.5
|
|
Stock price volatility
|
|
|
132% - 156%
|
|
Risk free interest rate
|
|
|
0.62 % - 1.54%
|
|
Expected dividends
|
|
|
—
|
|
Forfeiture rate
|
|
|
—
|
|
The table below represents the average assumptions
used in valuing the stock options and warrants granted in fiscal 2017:
|
|
|
Year Ended
December 31,
|
|
|
|
|
2017
|
|
Expected life in years
|
|
|
1.00 – 3.19
|
|
Stock price volatility
|
|
|
127% - 157%
|
|
Risk free interest rate
|
|
|
1.26 % - 1.70%
|
|
Expected dividends
|
|
|
—
|
|
Forfeiture rate
|
|
|
—
|
|
The assumptions used in the Black Scholes models
referred to above are based upon the following data: (1) the contractual life of the underlying non-employee options is the expected
life. The expected life of the employee option is estimated by considering the contractual term of the option, the vesting period
of the option, the employees’ expected exercise behavior and the post-vesting employee turnover rate. (2) The expected stock
price volatility was based upon the Company’s historical stock price over the expected term of the option. (3) The risk free
interest rate is based on published U.S. Treasury Department interest rates for the expected terms of the underlying options. (4)
The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and
does not expect to pay dividends to common shareholders in the future. (5) The expected forfeiture rate is based on historical
forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.
NOTE 8 - PREFERRED STOCK
The Class A Preferred Stock carries the
following rights and preferences;
Dividends
The Company shall, in its discretion, determine
when and if dividends will be paid on the Class A Preferred Shares, and whether it will be paid in cash, shares of Common Stock,
or a combination of both. All Class A Preferred Stockholders shall be treated the same with respect to the payment of dividends.
In the event the Company elects to pay a portion or all of the dividends on the Class A Preferred Stock by issuing shares of the
Company's Common Stock, the shares of common stock issued as dividends will be restricted, unregistered shares, and will be subject
to the same transfer restrictions that apply to the shares of Class A Preferred Stock. The dividend is payable as may be determined
by the Board of Directors, out of funds legally available therefor. The Class A Preferred Stock will have priority as to dividends
over the Common Stock.
Voting Rights
The holders of the Class A Preferred Stock
shall vote for the election of directors, and shall have full voting rights, except that each Class A Preferred share shall entitle
the holder to exercise ten thousand (10,000) votes for each one ( 1) Class A Preferred Share held.
Redemptive Rights
The Class A Preferred Stock shall not be redeemable.
Conversion Rights
The holders of the Class A Preferred
Stock will be entitled at any time to convert their shares of Class A Preferred Stock into shares of the Company's Common
Stock at the rate of one (1) share of Class A Preferred Stock be converted into common shares of the Company at an agreed
price of forty cents ($0.40) per share (the "Conversion Price"), which, based upon the recorded fair value of the
Class A Preferred Stock, results in a conversion ratio of 1 share of Class A Preferred Stock to approximately 250 shares of
common stock. No fractional shares will be issued.
The Conversion Ratio of the Class A Preferred
Stock shall be adjusted in certain circumstances, including the payment of a stock dividend on shares of the Common Stock and combinations
and subdivisions of the Common Stock.
In the case of any share exchange, capital
reorganization, consolidation, merger or reclassification, whereby the Common Stock is converted into other securities or property,
the Company will make appropriate provisions so that the holder of each share of Class A Preferred Stock then outstanding, will
have the right thereafter to convert such share of Class A Preferred Stock into the kind and amount of shares of stock and other
securities and property receivable upon such consolidation, merger, share exchange, capital reorganization or reclassification
by a holder of the number of shares of Common Stock into which such shares of Class A Preferred Stock might have been converted
immediately prior to such consolidation, merger, share exchange, capital reorganization or reclassification. If the shares of Common
Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, the Conversion Ratio shall be proportionately
increased in the case of subdivision of shares. If the shares of Common Stock are combined, consolidated or reverse split into
a smaller number of shares of Common Stock, the Conversion Ratio shall be proportionally decreased. The kind and type of Common
Shares issuable upon conversion of the Class A Preferred Stock both before and after combination, consolidation or reverse split
of the Common Shares shall be the same.
The same transfer restrictions imposed on the
Class A Preferred Stock shall be applicable to the Common Stock into which the Class A Preferred Stock is converted, although for
purposes of Rule 144 as presently in effect, the holding period requirement may be met by adding together the period in which the
Class A Preferred Stock is held and the period in which the Common Stock into which the Class A Preferred Stock is converted, is
held.
Other Provisions
The shares of Class A Preferred Stock to be
issued and any Common Shares into which it is converted, shall be duly and validly issued, fully paid and non-assessable. The holders
of the Class A Preferred Stock shall not have pre-emptive rights with respect to any shares of capital stock of the Company or
any other securities of the Company convertible into Common Stock or rights or options to purchase any such shares.
The Class E Convertible Preferred Stock
carries the following rights and preferences;
*
|
No dividends.
|
*
|
Convertible to common stock based upon proceeds received upon issuance of the shares, divided by the average closing bid price for the Company’s common stock for the 5 trading days prior to the conversion date, and is adjustable to prevent dilution. At December 31, 2017, the 20,000 Class E preferred shares were convertible to 245,098 common shares.
|
*
|
Convertible at the Option of the Company at par value only after repayment of the shareholder loans from Joseph Fiore and subject to the holder’s option to convert.
|
*
|
Entitled to vote 1,000 votes per share of Series E Convertible Preferred Shares.
|
*
|
Entitled to liquidation preference at par value.
|
*
|
Is senior to all other share of preferred or common shares issued past, present and future.
|
NOTE 9 – DISCONTINUED OPERATIONS
Restaurant
Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the
Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration
of the lease the restaurant closed. Pursuant to current accounting guidelines, the restaurant segment is reported as discontinued
operations.
The following table summarizes the assets and
liabilities of our discontinued restaurant segment's discontinued operations as of December 31, 2017 and December 31, 2016:
|
|
December 31, 2017
|
|
December 31, 2016
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
—
|
|
|
$
|
13,000.00
|
|
Inventory
|
|
|
—
|
|
|
|
12,000.00
|
|
Prepaid expenses
|
|
|
—
|
|
|
|
25,000.00
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
30,000.00
|
|
Other assets
|
|
|
—
|
|
|
|
16,000.00
|
|
Total Assets
|
|
$
|
—
|
|
|
$
|
96,000.00
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
22,000
|
|
|
$
|
60,000
|
|
Total Liabilities
|
|
$
|
22,000
|
|
|
$
|
60,000
|
|
The following table summarizes the results
of operations of our discontinued restaurant for the years ended December 31, 2017 and 2016 and is included in the consolidated
statements of operations as discontinued operations:
|
|
For the Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Revenues
|
|
$
|
420,000
|
|
|
$
|
1,413,000
|
|
Cost of sales
|
|
|
133,000
|
|
|
|
421,000
|
|
Gross Margin
|
|
|
287,000
|
|
|
|
992,000
|
|
Expenses
|
|
|
|
|
|
|
|
|
Labor and related expenses
|
|
|
177,000
|
|
|
|
471,000
|
|
Rent
|
|
|
77,000
|
|
|
|
278,000
|
|
Depreciation and amortization
|
|
|
20,000
|
|
|
|
68,000
|
|
Professional fees
|
|
|
33,000
|
|
|
|
2,000
|
|
Other general and administrative
|
|
|
102,000
|
|
|
|
198,000
|
|
Total Operating Expenses
|
|
|
409,000
|
|
|
|
1,017,000
|
|
Operating Income (Loss)
|
|
|
(122,000
|
)
|
|
|
(25,000
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
(10,000
|
)
|
|
|
—
|
|
Income (Loss) on discontinued operations
|
|
$
|
(132,000
|
)
|
|
$
|
(25,000
|
)
|
Other
During the year ended December 31, 2016, the
Company incurred additional expenses of $4,000 related to the winding-up of its former subsidiary Franklin Networks, Inc. The following
table provides additional detail of these losses which are reflected as a loss on discontinued operations.
|
|
December 31, 2016
|
Revenues
|
|
$
|
—
|
|
General and administrative
|
|
|
4,000
|
|
Loss from discontinued operations
|
|
$
|
(4,000
|
)
|
NOTE 10 - SUBSEQUENT EVENTS
During January and February 2018, the Company
issued 4.7 million shares of common stock for cash of $605,000 pursuant to various private placement agreements.
During January and February 2018, the Company
issued 4,441,943 shares of common stock with a fair value of $1,712,000 pursuant to various third-party service agreements.
On February 1, 2018, the Company issued 1.25
million shares of common stock with a fair value of $625,000 pursuant to existing employment and consulting agreements.